Crowdfunding Frequently Asked Questions

What is crowdfunding?

Crowdfunding is a way of raising finance for businesses by asking a large number of people each for a small amount of money. Through crowdfunding, you can use the internet to talk to thousands – if not millions – of potential funders.

Why do people crowdfund?

Crowdfunding can provide the opportunity for a business to get market validation for their product or service, support the business by allowing for pre-sales ensuring that some money is in the business before huge expenditure is required and allows for capital investment which can ensure a company continues to trade or grows.

What types of crowdfunding are there?

Crowdfunding is a quickly evolving industry with new crowdfunding platforms being launched all the time. The most popular types of crowdfunding are; Equity, Reward, Debt-based and Charitable Donor.

What are the differences between the different types of crowdfunding?

Equity: This is a type of crowdfunding where investors put money into the organisation in exchange they receive ownership of a small amount of the business. As the business succeeds the share value is likely to increase and when they sell their share get a greater amount of money than they invested.

Reward: Investors receive a ‘reward’ for investing money in the organisation. This can be in the form of a free gift such as a t-shirt or e-book, a discounted price on a product yet to be launched or

Debt-based: Investors buy long-term bonds in an organisation in exchange for favourable interest rates on repayments. These are often 3 to 5 year agreements

Charitable Donor: A donation to a community project, charity or not-for profit organisation.

What products and services are most suitable for crowdfunding?

Any product or service could be suitable for crowdfunding but it is essential have an engagement from a good network of supporters; the most successful campaigns tend to be products and services that are B2C products rather than B2B, the company or team have a proven track record in the field or industry that they are selling the product in and the product or service is genuinely innovative and would bring real added value to the marketplace.

What crowdfunding sites are there?

There is an ever-increasing number of crowdfunding platforms available to you to launch your crowdfunding campaign on each having their own audience and types of funder. The most popular sites include; Kickstarter, Indiegogo, Seedrs, Justgiving, Crowdcube – it is worth researching the audience on each of these before deciding on the most appropriate platform for your pitch.

What are the tax implications of crowdfunding?

We are not trained accountants or tax professionals so it is always worth seeking professional advice before undertaking any significant crowdfunding campaigns but below is our understanding of the tax implications

Equity: Equity investors usually hold some sort of shares in a company. These shares will often qualify for tax relief under the Enterprise Investment Scheme (EIS) (link this to: https://www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction), or the Seed Enterprise Investment Scheme (SEIS) linked this to: https://www.gov.uk/guidance/seed-enterprise-investment-scheme-background).

Reward: Reward crowdfunding is considered as a sales transaction between two parties and therefore both parties are subject to income tax or corporation tax if they exceed taxable thresholds.

Debt-based crowdfunding: The tax implications of this sort of crowdfunding follow that of any other form of debt. The lender is taxed on the receipt of interest and the borrower, assuming it is a business, normally receives a tax deduction for the interest payable

Charitable Donor: Donations are made by people who invest because they believe in the cause. In return, rewards may be offered, such as acknowledgement in a rock band’s album cover, tickets to an event, regular news updates, free gifts and so on. A donation will generally not be tax deductible for the donor.

What are the tax implications of crowdfunding?

We are not trained accountants or tax professionals so it is always worth seeking professional advice before undertaking any significant crowdfunding campaigns but below is our understanding of the tax implications

Equity: Equity investors usually hold some sort of shares in a company. These shares will often qualify for tax relief under the Enterprise Investment Scheme (EIS) (link this to: https://www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction), or the Seed Enterprise Investment Scheme (SEIS) linked this to: https://www.gov.uk/guidance/seed-enterprise-investment-scheme-background).

Reward: Reward crowdfunding is considered as a sales transaction between two parties and therefore both parties are subject to income tax or corporation tax if they exceed taxable thresholds.

Debt-based crowdfunding: The tax implications of this sort of crowdfunding follow that of any other form of debt. The lender is taxed on the receipt of interest and the borrower, assuming it is a business, normally receives a tax deduction for the interest payable

Charitable Donor: Donations are made by people who invest because they believe in the cause. In return, rewards may be offered, such as acknowledgement in a rock band’s album cover, tickets to an event, regular news updates, free gifts and so on. A donation will generally not be tax deductible for the donor.

How much does it cost to get support to run a crowdfunding campaign?

The cost of a crowdfunding campaign is bespoke to each client and can vary depending in the in-house skills of the team, what support is required and the timeline involved. Here at Brandrefinery we are a paid services marketing agency and therefore all our fees are detailed at the start of the process and paid at stages throughout the process regardless of success of the project.

Who might invest in a crowdfunding campaign?

Investing in crowdfunding is suitable to for anyone that has an interest in the product or service that is available. Many crowdfunding campaign have a low entry level cost and incrementally increase to significant investments. What is important for crowdfunding campaign managers to understand is that it is clear what people receive for their investment, any additional fees that they may incur, if there are any significant risks involved and possible returns.

When hosting a crowdfunding campaign do you get all the money pledged?

You don’t receive any money from crowdfunding campaigns until your initial target amount is met. If you do not reach the target then all money is returned to the investors. It is therefore better to have a lower target in order to receive payment.

What are stretch targets?

These are what you would spend your money if you exceeded your target – additional services or products that you would develop if you had additional funds.

What is an appropriate timeline for launching a crowdfunding campaign?

We would recommend that to have a successful campaign it is important to have at least 12 weeks of preparation time before launch in order to fully take advantage of the possible opportunities.

What happens if a business or venture you invest in or donate to goes bust?

Your money is always at risk and if you make an investment and the company goes into liquidation, you risk losing some or all of your investment. You will be treated like other investors of the same class by the liquidators, who will divide up any remaining assets in the business in proportion to shareholdings.

What are the pitfalls when launching a crowdfunding campaign?

There are a number of reasons why a crowdfunding campaign might not be successful these include;

The campaign is launched before it is ready to be: there is a lot of work and time required in managing a fundraising campaign and without this work you are unlikely to get the traction required to get the funds you require.

Costs are not carefully considered enough: It is important that you are offering the reward or share of the business at the right price. If this is incorrect you are unlikely to get the optimum number of investors.

Underestimating the cost of fulfilment: Investors on a crowdfunding website might be located all around the world. It is important that you take this into consideration when agreeing to dispatch the product as this could prove very costly.

Choosing the wrong platform: The audience of each crowdfunding platform is different and there are platforms that specialise in certain aspects of crowdfunding, you should fully research each one and ensure that the audience is appropriate for your product or service.